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Zacks Earnings Trends Highlights: JPMorgan and Wells Fargo
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For Immediate Release
Chicago, IL – October 12, 2023– Zacks Director of Research Sheraz Mian says, "Earnings reports from the big banks will highlight the multiple profitability headwinds facing the group. But sentiment remains so weak that even modestly positive results and commentary could push these stocks higher."
Bank Earnings Loom: A Challenging Setup
Note: The following is an excerpt from this week's Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
The coming earnings reports from the big banks will highlight the multiple profitability headwinds facing the group. But sentiment on the group remains so weak that even modestly positive results and commentary could push these stocks higher.
For 2023 Q3, total S&P 500 earnings are currently expected to be down -2.1% from the same period last year on +0.7% higher revenues, the 4th back-to-back quarter of declining earnings for the index.
Excluding the drag from the Energy sector, whose earnings are expected to decline -36.8% in Q3, earnings for the other 15 Zacks sectors in the S&P 500 index would be up +2.7% on +3.2% higher revenues.
Estimates for 2023 Q3 held up much better than had been the case in the comparable periods of other recent quarters. In fact, Q3 earnings estimates in the aggregate were barely down since the start of the period, with estimates modestly up when negative revisions to the Energy or Finance sector estimates are excluded.
To say that the setup for bank earnings remains unfavorable would be an understatement.
JPMorgan(JPM - Free Report) and Wells Fargo (WFC - Free Report) are on deck to report Q3 results before the market's open on Friday. Even JPMorgan, with its undisputed leadership status, is lagging the broader market, with the stocks of most of its peers in the red.
Net interest income, which banks make from their core banking business, will likely be modestly up relative to the same period last year for JPMorgan and Wells Fargo. But the outlook for this key profitability metric is weighed down by several headwinds, including a shifting mix in the deposit base and rising funding costs due to competitive dynamics following the turmoil in Spring caused by the wake of the Silicon Valley Bank failure.
Recent management commentary from JPMorgan, Wells Fargo, and others suggests stabilization on the deposits front. But with loan growth slowing down, as a result of supply as well as demand factors, they will be dealing with a stagnant to down base of earning assets even as margins are under pressure.
Credit quality metrics still remain strong, a function of the resilient economy. But, the Q3 reports will likely show growing signs of stress at the lower end of the income distribution. The commercial real estate space remains a problem area for the group that will unfold over the coming many quarters, with the coming Q3 earnings reports only marginally adding to our understanding of the full extent of the issue.
Beyond the core banking business, there is plenty of talk of 'green shoots' and lengthening 'deal pipelines.' Still, the outlook for the investment banking business is a function of macro uncertainties, particularly the Fed and the economy.
The expectation is that Q3 investment banking revenues in the aggregate will be up sequentially but remain below the year-earlier level. Trading revenues will likely be a bright spot for some of the players in Q3, particularly in the fixed income, currencies, and commodities (FICC) areas, but we will be heading into tougher comparisons in the coming quarters.
Given this earnings setup, it is no surprise that the overall trend on the estimate revisions front remains negative for the group.
Please note that this chart shows the aggregate revisions trend for the Zacks Major Banks industry, and the estimate being tracked here is the forward 12-month EPS estimate. That said, the revisions trend for JPMorgan and Wells Fargo remains positive.
For the Zacks Major Banks industry, which includes both JPMorgan and Wells Fargo, total Q3 earnings are expected to decline -8.4% from the same period last year on +6.5% higher revenues. Q3 earnings for the Zacks Finance sector are expected to be up +4.2% from the same period last year on +1.9% higher revenues.
The profitability headwinds facing the banks go some ways toward explaining the market's weak sentiment on the group. On some key valuation metrics, the group is currently trading at levels not seen in the last 10 years, making one wonder if sentiment had drifted way too low.
Relative to the S&P 500 index, stocks in the Zacks Major Banks industry are currently trading at 47% of the broader index, just a hair above the 45% level in May 2023 and below the 48% in March 2020. The median over the last 10 years has been 63%, with a high of 79% and a low of 45%.
With sentiment this weak, it wouldn't take much for these stocks to jump on even modestly positive Q3 results and some favorable commentary about the coming periods.
The Earnings Big Picture
Looking at Q3 expectations as a whole, total S&P 500 earnings are expected to be down -2.1% from the same period last year on +0.7% higher revenues.
As you can see from these quarterly earnings-growth expectations, the long-feared recession doesn't show up in this near-term earnings outlook.
A big-picture view of corporate profitability on a long-term basis doesn't leave much room for that development either.
Given the emerging consensus on the 'soft-landing' outlook for the economy, one can expect this favorable turn in the overall earnings picture to strengthen further as companies report Q3 results and share trends in underlying business.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Earnings Trends Highlights: JPMorgan and Wells Fargo
For Immediate Release
Chicago, IL – October 12, 2023– Zacks Director of Research Sheraz Mian says, "Earnings reports from the big banks will highlight the multiple profitability headwinds facing the group. But sentiment remains so weak that even modestly positive results and commentary could push these stocks higher."
Bank Earnings Loom: A Challenging Setup
Note: The following is an excerpt from this week's Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
To say that the setup for bank earnings remains unfavorable would be an understatement.
JPMorgan(JPM - Free Report) and Wells Fargo (WFC - Free Report) are on deck to report Q3 results before the market's open on Friday. Even JPMorgan, with its undisputed leadership status, is lagging the broader market, with the stocks of most of its peers in the red.
Net interest income, which banks make from their core banking business, will likely be modestly up relative to the same period last year for JPMorgan and Wells Fargo. But the outlook for this key profitability metric is weighed down by several headwinds, including a shifting mix in the deposit base and rising funding costs due to competitive dynamics following the turmoil in Spring caused by the wake of the Silicon Valley Bank failure.
Recent management commentary from JPMorgan, Wells Fargo, and others suggests stabilization on the deposits front. But with loan growth slowing down, as a result of supply as well as demand factors, they will be dealing with a stagnant to down base of earning assets even as margins are under pressure.
Credit quality metrics still remain strong, a function of the resilient economy. But, the Q3 reports will likely show growing signs of stress at the lower end of the income distribution. The commercial real estate space remains a problem area for the group that will unfold over the coming many quarters, with the coming Q3 earnings reports only marginally adding to our understanding of the full extent of the issue.
Beyond the core banking business, there is plenty of talk of 'green shoots' and lengthening 'deal pipelines.' Still, the outlook for the investment banking business is a function of macro uncertainties, particularly the Fed and the economy.
The expectation is that Q3 investment banking revenues in the aggregate will be up sequentially but remain below the year-earlier level. Trading revenues will likely be a bright spot for some of the players in Q3, particularly in the fixed income, currencies, and commodities (FICC) areas, but we will be heading into tougher comparisons in the coming quarters.
Given this earnings setup, it is no surprise that the overall trend on the estimate revisions front remains negative for the group.
Please note that this chart shows the aggregate revisions trend for the Zacks Major Banks industry, and the estimate being tracked here is the forward 12-month EPS estimate. That said, the revisions trend for JPMorgan and Wells Fargo remains positive.
For the Zacks Major Banks industry, which includes both JPMorgan and Wells Fargo, total Q3 earnings are expected to decline -8.4% from the same period last year on +6.5% higher revenues. Q3 earnings for the Zacks Finance sector are expected to be up +4.2% from the same period last year on +1.9% higher revenues.
The profitability headwinds facing the banks go some ways toward explaining the market's weak sentiment on the group. On some key valuation metrics, the group is currently trading at levels not seen in the last 10 years, making one wonder if sentiment had drifted way too low.
Relative to the S&P 500 index, stocks in the Zacks Major Banks industry are currently trading at 47% of the broader index, just a hair above the 45% level in May 2023 and below the 48% in March 2020. The median over the last 10 years has been 63%, with a high of 79% and a low of 45%.
With sentiment this weak, it wouldn't take much for these stocks to jump on even modestly positive Q3 results and some favorable commentary about the coming periods.
The Earnings Big Picture
Looking at Q3 expectations as a whole, total S&P 500 earnings are expected to be down -2.1% from the same period last year on +0.7% higher revenues.
As you can see from these quarterly earnings-growth expectations, the long-feared recession doesn't show up in this near-term earnings outlook.
A big-picture view of corporate profitability on a long-term basis doesn't leave much room for that development either.
Given the emerging consensus on the 'soft-landing' outlook for the economy, one can expect this favorable turn in the overall earnings picture to strengthen further as companies report Q3 results and share trends in underlying business.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.